Or, How Debt Ceilings, Tea, and the tradition of Governing in the U.S. Tangentially Relate

The political crisis du jour is over whether or not Congress will vote to raise the “debt ceiling,” aka the legal borrowing limit for the Federal Government. The broad consensus is that should the debt ceiling not be raised (as is customary), the Federal government would, for the first time ever, fail to pay – and perhaps even repudiate – its debts.

Now, the consequences of such an action are disputed; those seeking to hold firm on the debt ceiling (the Republicans) maintain that there would be no ill effects, just a healthful readjustment of budgetary priorities, while their opponents – and here that includes the Democratic party and associated partisans and officials, bankers, other Wall Street honchos, and most of the media – maintain that failing to raise the debt limit would be tantamount to a financial apocalypse, for the U.S., and possibly the entire world.

So there’s a bit of a gap in the conversation.

I bring it up here not to comment on the issue in particular – though there are some really interesting discussions happening, including some historical debates related to whether or not the 14th Amendment was designed to prevent just a crisis1 – but because lately I’ve been working through documents from the first few years after the Constitution, a period where Congress was determined to do exactly the opposite of what the Republicans are proposing today. Back in the 1790s, the overriding concern for the rulers of the newly re-organized American republic was to figure out how generate revenue so as to pay the U.S.’s debts.

The rub was that Congress had to find a way to do so consistent with the principles of the Revolution – and since there was no real agreement about what these were, or what that would look like, conflict ensued (some things never change). The parts of these machinations that typically get the most airplay are the debates over the “how, who, and what to pay” issues – the internal structuring of the national debt, the creation of a national bank, division of fiscal powers among the different branches, etc. These are the core issues around which the first partisan divide in the nation’s modern history formed, between “Federalists” (the Hamiltonian/Washingtonian conglomeration in favor of an active national government modeled in its fiscal policies after European powers) and the “Jeffersonians” (TJ and Madison’s more structured opposition party that favored a decentralized republic with weaker coercive power).

The attention this dynamic gets is justified – the people involved in these struggles certainly emphasized the “how, who, and what to pay” issues. But they weren’t the only problems being worked out. I’ve been looking how those early Congresses worked out the other part of the debt equation – the “where do we get revenue from” problem.

Here the partisan divide dissolves a bit, because the answer that the Founders gave to the revenue question basically boils down to one phrase: the tariff. The national government did implement other taxes in the early years – there was a pretty heavy tax on personal carriages2, and of course the excise tax on whiskey is well known – but until the introduction of the permanent income tax in the early 20th century, taxes on imported goods and international shipping were the primary revenue for the Federal Government. And, as you might expect of such an important component of government, during that period between Revolution and the 16th Amendment the tariff was among the most powerful drivers of American politics.

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Long-time readers of this blog will be unsurprised to find out that Asian trade was a non-trivial part of the tariff, in both the debates setting it up and the legislation itself. And in fact, there is a lot that’s unique about the way the Federal Government handled Americans’ involvement in Asian trade which suggests that policymakers regarded it as particularly important.3 But what interests me in connection with the debt ceiling controversy is not the protections the China trade received, but rather how the Federal Government resolved problems with the collection of tariffs on the trade, and what that says about the ultimate priorities of the Founding generation of legislators.

Despite what a visit to your local art museum might lead you to believe, the West’s trade with China in the late 18th-century was not about porcelain, silks, or lacquered furniture, but rather was almost entirely concerned with exchanging silver for tea. The American trade with China was no different; indeed “china ware” was carried back from Canton to U.S. markets chiefly as ballast. The Founding generation, having concluded that taxing widely-consumed beverages with mild psychoactive effects was the most effective, lucrative and appropriate way of gaining a steady income, made duties on tea one of the linchpins of the American revenue system.4 In the tariff acts from 1789 onward, and in the periodic special taxes for defending the frontier and paying down the debt, tea invariably appears as one of the key enumerated items singled out for special attention – and taxation.5

In the early years, though, both the success of the American trade in teas, and the amount of tax it could reasonably bear, were unknowns. It is unsurprising, then, that the government ran into trouble with collections. The problem was not that tea taxes were somehow verboten because of their role in sparking the Revolutionary struggle.6 The difficulty was more prosaic: an oversupplied market meant that merchants couldn’t pay their taxes without going broke.

It was a classic boom-bust case. Americans’ rush into the China trade in the late 1780s and early 1790s flooded the U.S. market with cargoes of tea – enough in 1790 alone for three years’ of domestic consumption, according to one (admittedly self-interested) China merchant.7 With supply and demand being in an inverse relationship and all, this in turn led to both a precipitous drop in the commodity’s price and a marked rise in petitions to Congress. As merchants found themselves with stocks of teas that could not be sold even at cost, they presented Congress with a dilemma: how to best secure an important source of revenue while at the same time encouraging growth in a key economic sector?8

The merchants themselves were divided. Some requested stronger protections from foreign competitors, up to and including a ban on sales of teas imported by European shippers; others merely requested “to be allowed a farther time for payment of the duties on a quantity of teas imported.” Though there was a strong sentiment in the early Congresses that the development of the China trade was of great importance as a means to national prosperity and security – as “a trade sought after by all the world” it seemed obvious to some members that it should be protected, one way or another – this feeling was not sufficiently shared to move more protective legislation out of committee.

Even Alexander Hamilton, who is sometimes presented as the protectionist avatar of American commerce, was ambivalent. Replying to a request to evaluate a petition from the “merchants of Philadelphia trading to India and China,” he told the House of Representatives that “the trade to India and China appears to lay claim to the patronage of the Government” but “a full and accurate examination should be had into the nature and tendency of that trade” before any “encouragement” or protection could be offered.9 In other words, Hamilton kicked the can down the road, a move likely made out of concern for maintaining government income – as Hamilton knew, protecting the American trade too aggressively was a sure way to choke off the stream of revenue that flowed into the Treasury from the high duties paid by foreign importers (who paid 50% higher duties on teas, and 700% higher tonnage duties). However, in a different report on a similar petition, the Secretary of the Treasury did suggest another option: that Congress extend “credit for the duties” due on tea.10

Though Hamilton’s advice was hardly gospel – Madison and other proto-Republicans in the House were at pains to reduce the his influence in all things financial – in this matter the legislature followed his lead and chose to amend only the administrative aspects of the tariff law. Specifically, Congress extended the amount of time American merchants could store imported teas without paying duties, first from nothing to one full year, and then later from one year to two; all the importer had to do was give the port collector a bond for future payments, which could be made as the tea was sold.11

In the event, this new system worked well: by offering merchants two-year interest-free loans on their taxes, the Federal Government provided the flexibility needed to keep the trade alive beyond one season of oversupply, while at the same time effectively securing an important long-term source of revenue. It was a neat piece of governance which allowed Congress leeway to raise taxes on teas repeatedly over the next few decades, without fear of harming the trade, as merchants would always have time to adjust to new market conditions.

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So what does this have to do with the debt ceiling negotiations? Well, I think the case of the tea tariffs offers us some insight into the particular ways our own political scene differs from those of the Revolutionary era. For the significant conservative political force in our own moment, the financial reputation of the U.S. is worth chancing in order to achieve a significant change in policy, whereas in the founding decades, for partisans of every stripe, any policy was worth changing in order to secure a sounder financial reputation.

Moreover, I think the audacity of the move – forego taxes in order to secure them! – is one worth remembering in any era where a flexible approach to ideology in governance seems rare.

(It’s also important to remember that – two centuries of hagiography to the contrary – this was not the compromise of a uniquely enlightened age. Recall that a key architect of this decision, Hamilton, got himself shot and killed by a political rival – something that is now, thankfully, nearly unheard of. And trust me when I say that the rhetoric exchanged between partisans, of this or almost any other age of American politics, is quite comparable to ours, in terms of outright viciousness; though earlier generations were perhaps more creative…)

More germane to my own inside baseball, the tea tariff decision overthrows the bipolar conclusions drawn in the current literature on the China trade. In contrast to writers who argue (implicitly or explicitly) that Asian commerce impinged only slightly if at all on the politics of early America, the care policymakers took with the tea trade suggests that concern with economic connections with Asia was most certainly a force in political debate. On the other hand, the government’s strategic deafness to merchant’s calls for commercial protection from competition belies accusations leveled by later politicians and historians that the:

“records of American legislation bear the most satisfactory testimony of the transcendent influence of the mercantile interests, and of the unceasing exertions made to fence it round with every species of protection the government could bestow which secured to the tonnage of our merchants, a monopoly of the whole of the China trade – and gave them paramount advantages in all other foreign trade.”12

Neither a controlling force in government nor a puff of air, the China trade was nonetheless an important component of the nation’s most crucial, and endlessly controversial, revenue laws. And the way the revenue it generated was flexibly supervised within the tariff laws typifies the pragmatic approach that early American politicians took to governing what they hoped would be a nation simultaneously prosperous and free.

3) Among all forms of overseas commerce, only the direct trade in China goods was singled out for protection, distinguished by the trade route rather than what commodity trafficked. Taxes on Asian goods – teas, China ware, etc. – were the lowest if they were imported by Americans directly from Canton, higher if they were brought by Americans from Europe, and highest if they were imported by foreigners to the U.S.

4) Taxes on imported wine and hard alcohol were the other key supports of the system.

5) 1 Stat. 25, Chapter 2, 1 Congress, Session 1, An Act: For laying a duty on goods, wares, and merchandises imported into the United States. (July 4, 1789); 1 Stat 145, Chapter 35, 1 Congress, Session 2, An Act: To provide more effectually for the collection of the duties imposed by law on goods, wares, and merchandise imported into the United States, and on the tonnage of ships or vessels. (Aug. 4, 1790); 1 Stat. 180, Chapter 39, 1 Congress, Session 2, An Act: Making further provision for the payment of the debt of the United States. (Aug 10, 1790); 1 Stat 219, Chapter 26, 1 Congress, Session 3, An Act: Making farther provision for the collection of the duties by law imposed on teas, and to prolong the term for the payment of the duties on wines. (Mar. 3, 1791); 1 Stat 411, Chapter 17, 3 Congress, Session 2, An Act: Supplementary to the several acts imposing duties on goods, wares, and merchandises imported into the United States. (Jan. 29, 1795); 1 Stat 503, Chapter 10, 4 Congress, Session 2, An Act: For raising a further sum of money by additional duties on certain articles imported, and for other purposes. (Mar. 3, 1797); etc.

6) As one republican columnist explained, the political implications of taxes mattered, not what they taxed: “people who revolted against that innovation [the 1773 Tea Act], certainly not for the magnitude of the duty, but from a wise anticipation of the horrid train for which it was calculated to open the way….” “For the National Gazette, On the Secretary’s Report on the Excise,” National Gazette, 26 April 1792

7) “Petition of Elias Hasket Derby, Salem, Mass., 10 June 1789,” in Kenneth R. Bowling, William Charles DiGiacomantonio, and Charlene Bangs Bickford, eds., Petition Histories and Nonlegislative Official Documents, vol. 8, Documentary History of the First Federal Congress of the United States of America, 1789-1791 (Baltimore: Johns Hopkins University Press, 1998), 407.

9) Emphasis mine. United States Congress, American State Papers: Finance, ed. Walter Lowrie and Matthew St. Clair Clarke (Washington, D.C: Gales and Seaton, 1832), 1:107, http://memory.loc.gov/ammem/amlaw/lwsp.html; “Report of the Treasury of the Secretary, 10 February 1791,” in Bowling, DiGiacomantonio, and Bickford, Petition Histories and Nonlegislative Official Documents, 8:382-383.

10) “Report of the Secretary of the Treasury, 2 March 1791,”Bowling, DiGiacomantonio, and Bickford, Petition Histories and Nonlegislative Official Documents, 8:411.

11) 1 Stat. 145, Chapter 35, 1 Congress, Session 2, An Act: To provide more effectually for the collection of the duties imposed by law on goods, wares, and merchandise imported into the United States, and on the tonnage of ships or vessels. (Aug. 4, 1790); 1 Stat. 219, Chapter 26, 1 Congress, Session 3, An Act: Making farther provision for the collection of the duties by law imposed on teas, and to prolong the term for the payment of the duties on wines. (Mar. 3, 1791)

12) Mathew Carey, The New Olive Branch, or, An Attempt to Establish an Identity of Interest Between Agriculture, Manufactures, and Commerce and to Prove, That a Large Portion of the Manufacturing Industry of This Nation Has Been Sacrificed to Commerce, and That Commerce Has Suffered by This Policy Nearly as Much as Manufactures (Philadelphia: M. Carey & Son, 1820), 213-214, http://catalog.hathitrust.org/Record/006512105. Carey’s summary of the early Congress’s favoritism toward the mercantile interest in general and the China trade in particular is repeated in Edward Dewey Graham, American Ideas of a Special Relationship with China, 1784-1900, Harvard dissertations in American history and political science (New York: Garland Publishing, Inc., 1988); Edward Dewey Graham, “Special Interests and the Early China Trade,” Michigan Academician 6, no. 2 (Fall 1973): 233-242.